What If Facebook Never Actually Does an IPO?

Pressure seems to be intensifying on Facebook to provide a way for institutional investors to buy its shares: according to one news report, the company is considering a private share sale to one or possibly two large institutions that could top $1 billion, and would value the entire company at $60 billion. While demand for the stock has been ramping up over the past year, Facebook has remained adamant that it is not planning to do an IPO any time soon. And continued private share sales like this one raise what for Silicon Valley could be an uncomfortable possibility: what if the social network never actually goes public at all?

As valuations for Facebook and other web companies have continued to climb — with Twitter’s market value estimated at between $8 billion and $10 billion based on reported acquisition talks, Groupon valued at more than $6 billion after turning down a takeover bid from Google in that range, and social-gaming company Zynga valued as high as $5 billion — institutional investors have been clamoring for access to these stocks. Some have been buying shares on secondary markets such as SecondMarket, as VC Andreessen Horowitz reportedly did recently with Twitter stock, and investment firms have even created funds specifically to put money in via the secondary market.

Facebook has no shortage of cash

Goldman Sachs invested $500 million in Facebook in December along with a group of investors, and then the investment bank also set up a private investment vehicle for its high net-worth clients that put another $1 billion in the company. The upshot of that, and the new private offering that Facebook is reportedly considering — which will apparently be open to employees, as was a previous $100-million share sale to Russian investor DST in 2009 — is that Facebook has, and will continue to have, plenty of funds to expand for at least the near future. That removes one rationale for going public.

Expectations of a Facebook IPO have reached such a fever pitch that there is bound to be at least a psychological impact if the company decides not to issue one at all. While the offerings of companies like Demand Media (which recently went public at a valuation of about $1.5 billion) and the upcoming or widely-expected share issues of others such as LinkedIn, Pandora and Zynga might fill some of that gap, many seem to be waiting for the blockbuster $50-billion-plus IPO of Facebook to really signal that the technology sector is back (or that it’s in a new bubble, depending on your point of view).

The 500-shareholder limit doesn’t force an IPO

But doesn’t Facebook have to go public if it reaches the 500-shareholder limit? No. The SEC requires only that companies with more than 500 shareholders have to file public financial statements, but that doesn’t mean the company has to actually offer shares to the public. Google went public after it crossed the limit, but it didn’t have to. Some companies decide that they might as well do an IPO if they are disclosing their financial information, but Facebook may decide otherwise. Author David Kirkpatrick, who wrote the book The Facebook Effect, has said that he doesn’t think CEO Mark Zuckerberg — who still controls the company and would like to keep it that way — will ever take it public.

The main reason companies file for IPOs isn’t that they want the public to be able to buy a stake in their shares, and it isn’t even that they want or need to raise money (although some obviously do). The main reason is so that early investors in the company can cash in on their holdings. And while some of Facebook’s early backers have sold portions of their stake in the company through secondary offerings to new investors — including Accel Partners, according to one report — that pressure to cash in will likely continue to be the biggest force pushing Facebook towards the public markets. But Facebook seems determined to resist that pressure for as long as it possibly can.